Dividend decision is one of the most important decisions in modern corporate finance. The surplus profits of a concern can either be distributed as dividends to the shareholders or they can be retained in the business and used for further expansion activities. Therefore, the dividend decision has an influence on the investing and financing decisions of a concern.

Moreover, the fundamental objective of any financial decision is to maximize the wealth of the shareholders. So the major question that arises is how far the dividend policy of a concern tends to maximize the wealth of the shareholders. There is no definite answer to this question. In fact, it is one of the most controversial and unresolved issues in corporate finance.

The formulation of divined policy is governed mainly by profitability and liquidity. In India the payment of dividend is governed by Companies Act, 2013. Moreover, the formulation of dividend policy depends on the type of dividend policy which different financial manager decides to pursue. Therefore, apart from profitability and liquidity there are several other complex factors which determine the dividend policy of a concern.

Large number of empirical studies has been conducted to examine dividend policy but they were limited mainly to the developed markets. Many of the studies conducted in the Indian context have been criticized either due to inadequate sample size or insufficient study period or due to absence of proper methodology. In this back drop, the current study has been undertaken on Nifty 50 Index companies for the financial year 2005-06 to 2014-15. The cardinal objective of the current study is to explore those factors which determine the corporate dividend decision of Nifty 50 Indexed companies.

The rest of the study is organized as follows. The second section reviews the literature on the empirical studies on factors affecting the dividend decision. The third section deals with the objective of the study, data set and the methodology applied in the study. The fourth section highlights the empirical findings. While the last section gives the concluding remarks.

REVIEW OF EXISTING LITERATURE:

Many studies have been conducted to analyse the corporate dividend behaviour. Lintner (1956) in his empirical research on dividend distribution pattern of US companies observed that current earnings and past dividend has significant effect on the dividend decision of the current year. Mazumdar (1959) studied the dividend behaviour using data over 5 years from 1946 and another of 6 years from 1950. He identified current profit and previous year’s dividend as the main determinants of the dividend behaviour followed by the company. Brittain (1966) in his study proposed an alternative hypothesis against Lintner. Brittain considered cash flow as better measure for real earnings. He pronounced the cash flow version of Lintner’s model. Higgins (1972) study disclosed negative relationship between financial leverage and dividend payout ratio. Dhameja (1978) made a study to test the dividend behaviour of Indian companies. The dividend was studied in relation to size, industry classification, growth and control. The study revealed that dividend has no significant relation between size and industry classification while it has inverse relation with growth. According to him, the dividend decision is explained by Lintner’s model with current profit and lagged dividend as explanatory variable. He observed that higher dependence on debt has an adverse impact on dividend policy.

Smith and Watts (1992) observed positive relationship of firm size with dividend yield while negative relationship of growth opportunity with dividend yield. Garg, Nagpal and Verma (1996) conducted a study to find out the factors affecting the dividend payment in textile industry during a 10 year period from 1980-81 to 1989-90. For the study a sample of 44 companies were selected. They observed that dividend payment was determined by liquidity, profitability and capital structure. With the increase in size of the companies; liquidity, profitability and capital base also improved which led to the increase in dividend payment.

Pandey (2001) studied the dividend behaviour of the companies listed in Kuala Lumpur stock exchange (KLSE). The result disclosed that in Plantation and Consumer industries which have fewer opportunities of growth were able to pay the highest dividend. On the other hand, Construction industry which had adequate growth opportunities paid lower dividend as they were left with little cash. Fama and French (2001) in their study of NYSE, AMEX and NASDAQ list firms during the period from 1926 to 1999 observed that size, profitability and investment opportunity are the most important factors that affect the dividend decision.

Mahakud (2005) in his study observed direct relationship between dividend and sales, profit, size of the firm and past divided. Negative relationship was observed between dividned and debt equity ratio. Amidu and Abor (2006) undertook a study based on the 22 listed companies in Ghana, which accounted for 76 per cent of the listed companies covering a period of 6 years from 1998 to 2003. The study revealed positive correlation between dividend payout ratio and profitability, cash flow and tax. Negative correlation existed between dividend payout ratio and risk, institutional holdings, growth and market-to-book value. Anil and Kapoor (2008) analysed the dividend payout ratio of IT companies over a period of six years from 2000 to 2006 and identified current and anticipated earnings, liquidity, corporate tax, risk and growth as the key factors affecting the dividend payout ratio.

Sur and Majumdar (2012) in their study found an inverse relationship between liquidity and dividend payout ratio. They further observed that current earnings, past earnings, cash flow and past dividend failed to have any impact on the dividend payment of the companies under study. Singhania and Gupta (2012) used Tobit model in identifying the factors that determine the dividend policy and observed that market price to book value ratio and market capitalization were affecting the dividend decision while the results failed to find any relationship of dividend with leverage and profitability.

Maladjian and Khoury (2014) observed positive relationship of dividend with firm size and past dividend while negative relationship dividend was observed with profitability and growth. Labhane and Mahakud (2016) examined the determinants of dividend payout ratio of Indian companies over a period from 1994-95 to 2012-13 and observed that leverage, life cycle, size, profitability and liquidity have significant impact on dividend payment. Majumdar (2016) tested the Lintner’s model in the Indian FMCG sector and observed that Indian FMCG companies mainly relied on the past dividend in designing their dividend policy.

RESEARCH DESIGN

This section deals with the Objectives of the study, selection of the sample companies, the period of study, variable selection and methodology.

OBJECTIVE:

The main objective of the present study is to analyse the factors which influence the dividend policy of Indian corporate sector. More specifically the study seeks to identify how far these factors play a significant role in designing the dividend policy of Nifty 50 Index companies.

SAMPLE SELECTION AND STUDY PERIOD:

National Stock Exchange (NSE) is the leading stock exchange of India. The Nifty 50, commonly known as Nifty is the flagship index of NSE which is an indicator of the Indian capital market. In order to fulfill the objective of the study those companies listed under Nifty has been initially considered for the study. The study is conducted over a ten year period ranging from 2005-06 to 2014-15. Those companies which have not paid dividend for more than one year during the study period and those companies for which the complete data set is not available have been excluded for the purpose of the study. Accordingly, 46 companies have been finally selected for analysis. The data for the sample period have been obtained from secondary source i.e. Capitaline Corporate Database of Capital Market Publishers (I) Ltd. Mumbai.

SELECTION OF VARIABLES:

In order to analyse the dividend policy of the selected companies, the dividend payout ratio (DPR) has been used as the indicator of the dividend policy adopted by the companies under study. Dividend payout ratio, dividend yield and dividend per share are commonly used as indicators for the nature of dividend policy adopted by a company. The current study considers DPR as the indicator of dividend policy due to the fact that out of these three measures; DPR only considers the dividend payment in relation to the income level (Rafique, 2012). Moreover, the previous researchers have used DPR as the measure of dividend policy (Rozeff, 1982; Lloyd et. al, 1985; Amidu and Abor, 2006; Sur and Majumdar, 2012). In the present study DPR is measures as a ratio of cash dividend to net profit after tax.

FACTORS INFLUENCING DPR:

Profitability (PROF): Net earnings is perhaps the most important factor that influences the dividend decision of a company. It is generally argued that if the profits of a company are higher it is likely to pay higher dividend as it indicates good financial health of the company. Profitability is measured by net income divided by shareholder’s equity.

Liquidity (LIQ): The current study measures liquidity by current ratio which is computed by current assets divided by current liabilities. Liquidity has direct relationship with dividend decision of a firm. A firm with higher liquidity tends to pay more divided and vice versa.

Leverage (LEV): Interest payments are contractual in nature and paid irrespective of the earnings of a business for the year. Therefore, the magnitude of interest payment has an effect on the cash position of the company, on the cash flows during the year and on the profits available for distribution of dividends. As a result companies with higher financial leverage tend to pay lower divided. Leverage is measured as a ratio of total debts to total assets.

Firm Size (SIZE): It is theoretically argued that firms with larger size tend to pay more dividends. Though earlier studies of Rozef (1982), Al-Kuwari (2009) disclosed contrary view. Firm Size is computed as the natural logarithm of total assets.

Growth (GRO): The ratio of change in revenue to sales is used as a proxy for growth. Growth firm requires money to fund their investment programme and therefore they tend to retain greater proportion of their earnings resulting to lower dividend payout.

Free Cash Flow (CF): The pattern of cash flow has an impact on the cash position of the company which in turn has a relation with the cash requirement for dividend payment. Cash flow is measured by the ratio of net operating cash flow to total assets.

Life Cycle (LC): The life cycle theory advocated by Muller (1972) suggests that dividend payment of the firm depends on its life cycle. Matured firms in comparison to young firms have lesser investment opportunity and more accumulated profits resulting in more dividend payments.

Past Dividends (PD): The firms while pursuing their dividend policy strives to maintain the stability in dividend payment. It is generally perceived that firms with stable dividends tend to attract the investors. Therefore, past dividend have a positive impact on the current years dividend payment. Last year’s dividend payout ratio is used as a proxy of past dividends.

The variable that influences the dividend payout along with their expected relationship have been summarized in Table 1.

Table 1: Variables with Expected Relation with Dividend

METHODOLOGY:

The present study seeks to explore the factors that determine the dividend payment of India by using pooled and panel data regression analysis.

Y_it= α +β¹X_it + ε_it(pooled model) (1)

Y_it= α_i +β¹X_it + ε_it(fixed effect model) (2)

Y_it= α +β¹X_it + (ε_it + u_i) (random effect model) (3)

Y_it= DPR of firm i in the year t

α = Intercept coefficient of firm i

β¹ = Coefficients of the regressors

X_it= Factors influencing DPR of firm i in the year t, the factors are PROF, LIQ, LEV, SIZE, GRO, CF, LC and PD

u_i= individual specific error term

ε_it = combined timesseries and cross section error

Initially the pooled regression is carried on and variance inflation factor (VIF) was used to assess the multi-collinearity. Then the Breusch-Pagan Lagrange Multiplier test to check the robustness of panel model over pooled model and Hausman test to choose an appropriate panel data model have been performed.

STATISTICAL RESULTS:

In this section the empirical analysis of the factors influencing dividend have been presented. Table 2 reports the variance inflation factor (VIF) which have been used to assess the multi-collinearity. VIF scores of less than 10 suggest the data is free from multi-collinearity and stability of the parameter estimates (Neter et al., 1985; Dielman, 1991). Mean VIF of 1.40 as shown in Table 2 suggests that the data is free from multi-collinearity. Table 3 discloses the regression results using pooled and panel models. The Breusch-Pagan Lagrange Multiplier test is 44.91 and statistically significant which suggests the suitability of panel model over the pooled model. The Hausman test score of 163.10 which is statistically significant indicates the suitability of 'fixed effect' model over the 'random effect model'.

The result of the pooled regression model discloses that apart from Free Cash Flow all the other factors selected for the study played a significant role in designing the dividend policy of the company. Since the results from the Breusch-Pagan Lagrange Multiplier rules in favour of the panel model over the pooled model and the Hausman test favours the use of 'fixed effect' model over the 'random effect model', the results of the 'fixed effect model’ has been reported in this study.

The 'fixed effect' model discloses that profitability, liquidity, growth, free cash flow and past dividend played significant role in designing the dividend policy of the Indian companies during the study period.

The results disclose positive relationship of profitability with dividend. The outcome is consistent with most of the earlier studies of Mazumdar (1959), Garg, Nagpal and Verma (1996), Mahakud (2016), Amidu and Abor (2006) and Labhane and Mahakud (2016). Table 3 reveals negative significant relationship of growth with dividend payments. The result is in line with the expectation that growth has negative impact on dividend payment and suggests that growing companies require more funds to finance their growth opportunities and they would retain their earnings by paying lower dividends. Moreover, the result is consistent with the findings of Dhameja (1978), Smith and Watts (1992), Pandey (2001) and Maladjian and Khoury (2014). Past Years’ dividend is found to be positive and statistically significant in influencing the current year’s dividend. This suggests that the Indian companies tend to follow stable dividend company. The result is in line with the study of Maladjian and Khoury (2014).

Liquidity and free cash flow both reported significant negative relationship with dividend. The outcome is not line with the theoretical argument and the result is not consistent with the previous studies. There might be two reasons for this outcome. The sample companies have ample growth opportunity and these companies spend their money on expansion programme and are less inclined towards paying dividend. On the other hand the companies follow stable dividend policy and pay dividend at their desired level even if they have sufficient cash balance. The result conforms to the findings of Sur and Majumdar (2012) who found an inverse relationship between liquidity and dividend payout ratio.

Leverage, Firm Size and Life Cycle failed to have any impact on the dividend payment during the study period. Table 3 reveals significant R² of 0.4842 implying moderate explanatory power of the regression results. Therefore, the selected variables were jointly influencing the dividend payment to the extent of 48.42 per cent.

Table 2: Collinearity Diagnostics

Variable	VIF
PROF	1.77
CF	1.77
SIZE	1.55
LEV	1.54
PD	1.18
LC	1.16
LIQ	1.15
GRO	1.07
Mean VIF: 1.40

Table 3: Regression Results

	Pooled Model	Fixed Effect	Random Effect
Dependent Variable: DPR
Independent Variable
Constant	0.3015	0.158	0.2943
	(0.011)	(0.060)	(0.016)
PROF	0.3702 ***	0.1999*	0.3693***
	(0.000)	(0.060)	(0.000)
LIQ	-0.0153**	-0.0266***	-0.01765**
	(0.034)	(0.006)	(0.018)
LEV	-0.0381**	-0.0449	-0.0385**
	(0.017)	(0.544)	(0.020)
SIZE	0.0173**	-0.0084	0.0159**
	(0.035)	(0.590)	(0.063)
GRO	-0.1314***	-0.1323***	-0.1322***
	(0.001)	(0.000)	(0.001)
CF	-0.0011	-0.0022*	-0.0013
	(0.356)	(0.086)	(0.308)
LC	-0.3425***	0.188	-0.3089***
	(0.003)	(0.242)	(0.009)
PD	0.4132***	0.1912***	0.3862***
	(0.000)	(0.000 )	(0.000)
R-square		0.4842	0.7746
Breusch-Pagan Lagrange Multiplier test	44.91***
	(0.000)
Hausman Test	163.10***
	(0.0001)

*indicate significance at 10% level, ** indicate significance at 5% level, *** indicate significance at 1% level

Figures in the parentheses indicates probability level

CONCLUDING REMARKS:

This paper studies the impact of profitability, liquidity, leverage, size, growth, free cash flow, life cycle and past dividend on dividend payout on Nifty 50 Index companies for the financial year 2005-06 to 2014-15. The empirical result suggests that profitability and past divided are positively and liquidity, free cash flow and growth are negatively affecting the dividend payout ratio. This indicates that companies which are profitable are paying dividends but the companies mostly prefer a stable dividend payout. Moreover, companies with growth opportunities prefer to retain profit and utilize their available liquidity to finance their investment programme rather than follow a aggressive dividend policy.

REFERENCES:

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Received on 09.04.2017 Modified on 11.05.2017

Asian J. Management; 2017; 8(3):718-722.

DOI: 10.5958/2321-5763.2017.00113.5

Variable	Symbol	Computation	Expected Relation with Dividend
Dividend Payout Ratio	DPR	Cash Dividend/ Net Profit After Tax
Profitability	PROF	Net income / Shareholder’s Equity	+
Liquidity	LIQ	Current Ratio =Current Assets/Current Liabilities	+
Leverage	LEV	Total Debts / Total Assets	-
Firm Size	SIZE	Natural Logarithm of Total Assets	-
Growth	GRO	(Current Revenue- Previous Revenue)/ Sales	-
Free Cash Flow	CF	Net Operating Cash Flow to Total Assets	+
Life Cycle	LC	Retained Earnings/Total Equity	+
Past Dividends	PD	Previous Year’s Dividend Payout Ratio	+